- On January 10, 2025, the IRS released proposed regulations for clean vehicle credits under Section 45W, Qualified Commercial Clean Vehicles.
- The proposed regulations provide new guidance regarding incremental cost, eligibility, and reporting requirements for the qualified commercial clean vehicle credit first enacted by the Inflation Reduction Act of 2022 (IRA).
Background
The IRA introduced and amended several clean energy credits, including §45W. Under §45W, businesses and tax-exempt organizations are eligible to claim a credit for placing in service a qualifying commercial clean vehicle, including certain mobile machinery, after December 31, 2022 and before January 1, 2033.
Key Considerations
While other clean vehicle credits have modified adjusted gross income limitations like §30D, that limitation is not present for taxpayers utilizing §45W.
A vehicle must meet all the following requirements to qualify, among others:
- Be made by a qualified manufacturer
- Be for use or lease in the business
- Meet specific requirements related to battery capacity or fuel cell components, as applicable
- Be used primarily in the United States
- Not have been allowed a credit under §30D or §45W previously
- Have a vehicle identification number which is included on the income tax return for the tax year the vehicle is placed in service
The initial credit is the lesser of:
- 15% of the vehicle’s basis (30% if the vehicle is not powered by a gas or diesel engine), or
- The incremental cost of the vehicle
The credit is limited to a maximum of $7,500 for vehicles with a gross vehicle weight rating under 14,000 pounds or $40,000 for all other vehicles.
Proposed Regulations
While the proposed regulations provide a magnitude of detailed guidance, the overall theme involves these key areas:
Incremental Cost
The proposed guidance outlines a new method to determine incremental cost in addition to the previously provided safe harbor methods outlined in Notices 2023-9, 2024-5, and 2025-9. The new method involves relying on manufacturer cost guidance specific to the purchased vehicle, U.S. Department of Energy (DOE) guidance, and a comparable vehicle to determine the incremental cost.
Vehicles previously placed in service can use the same incremental cost methods as a new vehicle with a multiplication of a residual factor determined by the age of the vehicle. The calculation can vary based on facts and circumstances, so taxpayers will want to consider the guidance prior to finalizing any calculation.
Treasury and the IRS, in coordination with the DOE, have expressed intention to provide specific safe harbors for different segments of the vehicle market soon. Taxpayers may rely on the existing safe harbor in the interim.
Vehicle Eligibility
The proposed guidance indicates only vehicles used 100% in a trade or business are eligible for a credit under §45W with an exception for de minimis personal use. Leased vehicles may be eligible for a §45W credit if the lease is respected for tax purposes, allowing the lessor to be treated as having a depreciable interest in the vehicle.
The guidance provides further clarity that used vehicles are eligible for a credit under §45W so long as a credit was not claimed under §30D or §45W previously. This will present a challenge in some cases as taxpayers may not have the required information about a vehicle’s history, and the IRS would be prohibited from providing such information.
Vehicle Returns or Disposals Timing
There have been many questions regarding the timing of §45W credits in relation to the vehicle’s time in service. Vehicles that are returned or resold within 30 days are not eligible to claim a §45W credit, and the next buyer has implications as it pertains to their potential clean vehicle credit.
Vehicles that are resold or where business usage falls under 100% within 18 months of the placed-in-service date may become ineligible for a §45W credit or subject to recapture on a previously claimed credit.
Challenges Mentioned
A qualified commercial clean vehicle, among other requirements, must generally be treated as a motor vehicle for purposes of Title II of the Clean Air Act and be manufactured primarily for use on public streets, roads, and highways (excluding rail) or be a vehicle that qualifies as mobile machinery under §4053(8) to claim a §45W credit.
Under the proposed regulations, absent a 17-digit NHTSA-required VIN, an off-road vehicle or mobile machinery is currently ineligible for the §45W credit. Off-road vehicles that are expected to be §45W eligible may be ineligible because of, but not limited to, the manufacturer not being a qualified manufacturer or the taxpayer not being able to verify the vehicle’s gross vehicle weight rating. Off-road vehicle and mobile machinery identification systems are being studied to help identify potential approaches that may be considered in a consistent manner. Treasury and the IRS specifically requested comments regarding these issues.
The IRS estimates there are approximately 4,500 off-road and 77 on-road manufacturers.
How Forvis Mazars Can Help
The proposed guidance is simply that, proposed. The regulations, once finalized, would generally apply to tax years ending the date of publication in the Federal Register. Treasury and the IRS are asking for comments by March 17, 2025, with a public hearing currently scheduled for April 28, 2025. While comments are anticipated, there are many unknowns about the timing of future §45W guidance. Forvis Mazars will continue to monitor.
Please reach out to a professional at Forvis Mazars to discuss how these proposed regulations may impact your business.